We lumped these two cases together because they present pretty much identical facts, legal issues, and outcomes. Indeed, the opinion sections of each decision contain virtually identical structure and language. You can read our full recaps of both ALJ Determinations here and here. The issue in these cases was whether security services provided at real property construction projects were taxable.
This should be an easy question, right? Wrong. It actually requires a rather nuanced analysis of two statutory provisions that seem diametrically opposed. Tax Law § 1105(c)(8) imposes sales tax upon security services of every nature. However, Tax Law § 1105(c)(5) exempts services to real property in capital improvement projects. So what happens when otherwise taxable security services are performed at a capital improvement job site? Which provision wins? Well, the ALJ determined that the tax imposition statute for security services takes precedent over the “more general” tax exception relating to services performed at capital improvement projects.
Though we had some questions about this approach in our reviews of the ALJ Determinations, the Tribunal affirmed the ALJ’s determination.
The Tribunal first notes that these cases are not concerned with a tax imposition statute. Tax Law § 1105(c)(8) imposes sales tax on the sale of protective services. This section of the law contains no exclusions or exemptions for capital improvements. Therefore, according to the Tribunal, “the question here is not whether the subject services are subject to taxation, but whether taxation is negated by a statutory exclusion or exemption.” This is important because were the Tribunal to view these cases as construing a tax imposition statute, it would be compelled to construe the law most strongly against the Division and in favor of Petitioners.
The Tribunal then effectively states that these matters are controlled by Matter of Robert Bruce McLane Assocs., Inc. v Urbach, a Third Department case that analyzes this exact issue. See 232 A.D.2d 826 (3rd Dept. 1996). Petitioners responded to this case by asking the Tribunal to “revisit” the McLane decision (I’m not sure exactly what that means – as if the Tribunal could somehow disregard binding authority) because the Division “has inconsistently applied the McLane ruling and has inconsistently followed its own regulations.”
The Tribunal disagreed with this assertion, first citing the fact that Tax Law § 1105(c)(8) was enacted 25 years after the sections of the law that excluded services to capital improvements, and, therefore could have included a similar exclusion for the security services. According to the Tribunal, “[t]he failure of the Legislature to include a capital improvement provision in Tax Law § 1105(c)(8), therefore, can be taken as an indication that its exclusion was intended.”
As support for its contention that the Division has inconsistently applied the provisions at issue, Petitioners cited the Tribunal decision Matter of L&L Painting Co., Inc., a case handled by our law firm. In L&L Painting, the Tribunal “determined that the installation of a platform as part of a protective containment system was a necessary prerequisite to a capital improvement project at a bridge” and was therefore not taxable. Petitioners argued that both the nontaxable “protective containment system” in L&L Painting, and the nontaxable “temporary protective pedestrian walkways” listed in the sales tax regulations (see 20 NYCRR 541.8(a)), contradict the conclusion that security services should be taxable in these cases. However, the Tribunal largely dodged the larger substantive points Petitioners were making by noting that: (1) Tax Law § 1105(c)(8) was not at issue in L&L Painting, and (2) Petitioners failed to meet their burdens to show that the regulation is irrational and inconsistent with the Tax Law.
I’m struck by the fact that just because an argument wasn’t raised in a case doesn’t mean that it couldn’t have been. And just because an issue is missed in a case, doesn’t mean there isn’t still a potentially open issue that should be addressed to help inform taxpayers regarding the proper application of the Tax Law. But I can appreciate that perhaps the Tribunal would not have the facts necessary to analyze the nature of the transaction from a “protective services” perspective. It remains unclear to me, however, exactly why Petitioners failed to meet their burdens to show that the regulation is irrational and inconsistent considering that the Tribunal cited no specific deficiencies. I could see some valid arguments - temporary protective pedestrian walkways are not similar to the type of “protective services” taxable under Tax Law § 1105(c)(8) – but without any analysis, one is left to wonder.
Finally, Petitioners cited to the authority that concludes that interior decorating services cease to be taxable when the interior decorator also installs the design (thereby becoming a contractor and bringing the capital improvement service exclusion into play). Unfortunately for Petitioners, the Tribunal adopted the analysis we were concerned with in the initial blogpost on 608 Franklin (are the members of the Tribunal among our twelve or so readers?), and distinguished this authority factually – i.e., unlike the interior decorator, the vendors selling Petitioners security services did not thereafter install a capital improvement.
It will be interesting to see if Petitioners decide to take these cases to the Third Department to see if it is troubled by the fact that the Division “has inconsistently applied the McLane ruling and has inconsistently followed its own regulations.” Because the Third Department is really the correct forum for overturning McLane, these cases may just be the perfunctory undercard of the main event.
